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SIR can be satisfied by third party payment, Florida Supreme Court holds

Addressing a factual situation that is not uncommon, the Florida Supreme Court recently held that a payment made by a subcontractor under an indemnity agreement counts toward meeting the insured general contractor’s self-insured retention. The court further held that the subrogation provision in the policy did not abrogate Florida’s “made whole doctrine,” which requires that the insured be made whole before its insurer when a covered loss occurs. The decision resulted in the subcontractor’s insurer paying $1 million of a $1.6 million settlement, the general contractor’s insurer paying $600,000, and the general contractor paying nothing. In addition to relying on interpretation of the self-insured retention language in the policy, the court reasoned that the general contractor already had paid its share when it bargained to obtain indemnification from its subcontractor.

Detailed Discussion

A homeowner was injured when she fell while using her attic stairs. The homeowner sued ICI Homes, the company that built her home. ICI turned to subcontractor Custom Cutting, which was responsible for the installation of attic stairs in the home, pursuant to an indemnification clause in the subcontract between ICI and Custom Cutting.

Custom Cutting and its insurer, North Pointe Insurance Company, along with ICI and its insurer, General Fidelity Insurance Company, participated in a mediation of the homeowner’s claim. The parties agreed to a $1.6 million settlement. On behalf of Custom Cutting, North Pointe paid $1 million, but it was not resolved who should pay the remaining $600,000.

ICI’s policy with General Fidelity contained a $1 million self-insured retention endorsement, which stated that General Fidelity would provide coverage only after ICI had exhausted the $1 million SIR. According to General Fidelity, because North Pointe, not ICI, had paid the $1 million, ICI was responsible for $600,000. ICI, on the other hand, argued that General Fidelity was responsible because the $1 million SIR had been satisfied, even if ICI had not paid it.

Both parties contributed $300,000 to satisfy the settlement, and reserved their rights against each other. ICI then sued General Fidelity. A federal district court in Florida ruled for General Fidelity, but on appeal, the Eleventh Circuit Court of Appeals found no controlling Florida law and certified two questions to the Florida Supreme Court. Specifically, the Eleventh Circuit asked: 1) whether the General Fidelity policy allows ICI to apply indemnity payments received from a third party towards its self-insured retention; and 2) if the answer to question no. 1 is yes, whether the subrogation provision in the policy results in General Fidelity being made whole before ICI.

As to the first question, the SIR endorsement in the General Fidelity policy stated “[w]e have no duty to defend or indemnify unless and until the amount of the ‘Retained Limit’ is exhausted by payment of settlements, judgment, or ‘Claims Expense’ by you” and “The ‘Retained Limit’ will only be reduced by payments made by the insured.” Although General Fidelity argued that this language unambiguously required ICI to pay the SIR from its own pocket, the Florida Supreme Court disagreed. “The language of the instant policy states that the retained limit must be paid by the insured, but does not specify where those funds must originate,” the court wrote. “Requiring payment to be made from the insured’s ‘own account’ is not necessarily the same as requiring that it be paid ‘by you.’”

Further, the court added, ICI “paid for” the SIR by negotiating for the indemnity protection afforded by the subcontract with Custom Cutting. “The contract between Custom Cutting and ICI, which included the right to indemnification, was entered into six years before the General Fidelity policy was purchased by ICI,” the court said. “ICI paid for the indemnity protection in the purchase price of the Custom Cutting subcontract and therefore hedged its retained risk in this manner. ICI bargained for and paid for this right to indemnification and, without an express policy provision to the contrary, should be able to use it to satisfy the SIR.” Thus, the court answered the first certified question in the affirmative.

As to the second certified question, ICI cited the “made whole” doctrine, applied by Florida courts, requiring that the insured be made whole before its insurer when a covered loss occurs. General Fidelity argued that the subrogation provision in its policy trumped the “made whole” doctrine and required that its loss be satisfied first by the amounts recovered from Custom Cutting. The court disagreed, holding that the “‘made whole doctrine’ is still applicable despite the insurance subrogation provision. As Florida law explains, because subrogation is an offspring of equity, equitable principles (such as the ‘made whole doctrine’) apply even when the subrogation is based on contract, unless the contract contains express terms to the contrary. . . . In the absence of such express language, equitable principles prevail.”

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